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Policy Uncertainty and Cost of Delaying Reform: The Case of Aging Japan

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  • Sagiri Kitao

    (Keio University)

Abstract

Reform is inevitable in an aging economy with a generous pay-as-you-go social security system. Often, however, the timing and structure of reform are unknown. We explicitly model policy uncertainty in a general equilibrium life-cycle model and let agents update expectations and react as uncertainty is resolved over time. Using the case of Japan, a country facing severe demographic and fiscal challenges, we quantify welfare tradeoff across generations by delaying reform or reducing its scope. Individuals respond to a delay by dis-saving and working less, while facing higher taxes to cover additional expenditures during the transition. Fiscal uncertainty itself has a more significant adverse effect on older individuals, who face greater income risks and a lower return on their retirement savings. (Copyright: Elsevier)

Suggested Citation

  • Sagiri Kitao, 2018. "Policy Uncertainty and Cost of Delaying Reform: The Case of Aging Japan," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 27, pages 81-100, January.
  • Handle: RePEc:red:issued:16-328
    DOI: 10.1016/j.red.2017.11.005
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    References listed on IDEAS

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    1. Huixin Bi & Eric M. Leeper & Campbell Leith, 2013. "Uncertain Fiscal Consolidations," Economic Journal, Royal Economic Society, vol. 0, pages 31-63, February.
    2. Kitao, Sagiri, 2015. "Pension reform and individual retirement accounts in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 38(C), pages 111-126.
    3. Fumio Hayashi & Edward C. Prescott, 2004. "The 1990s in Japan: a lost decade," Chapters,in: The Economics of an Ageing Population, chapter 2 Edward Elgar Publishing.
    4. Auerbach, Alan J & Hassett, Kevin A, 2002. "Fiscal Policy and Uncertainty," International Finance, Wiley Blackwell, vol. 5(2), pages 229-249, Summer.
    5. Shinichi Nishiyama & Kent Smetters, 2007. "Does Social Security Privatization Produce Efficiency Gains?," The Quarterly Journal of Economics, Oxford University Press, vol. 122(4), pages 1677-1719.
    6. Selahattin İmrohoroğlu & Sagiri Kitao & Tomoaki Yamada, 2016. "Achieving Fiscal Balance In Japan," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57, pages 117-154, February.
    7. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, Oxford University Press, vol. 131(4), pages 1593-1636.
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    Citations

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    Cited by:

    1. MORIKAWA Masayuki, 2017. "Impact of Policy Uncertainty on Consumption and Saving Behavior: Evidence from a survey on consumers," Discussion papers 17075, Research Institute of Economy, Trade and Industry (RIETI).
    2. Sagiri Kitao, 2017. "When do we Start? Pension reform in ageing Japan," The Japanese Economic Review, Japanese Economic Association, vol. 68(1), pages 26-47, March.
    3. MORIKAWA Masayuki, 2016. "How Uncertain Are Economic Policies? Evidence from a survey on Japanese firms," Policy Discussion Papers 16008, Research Institute of Economy, Trade and Industry (RIETI).
    4. Keisuke Otsu & Katsuyuki Shibayama, 2018. "Population Aging, Government Policy and the Postwar Japanese Economy," Studies in Economics 1809, School of Economics, University of Kent.
    5. Jouchi Nakajima, 2018. "The role of household debt heterogeneity on consumption: Evidence from Japanese household data," BIS Working Papers 736, Bank for International Settlements.
    6. Michuda, Aleksandr, 2018. "Political Contributions and Land Reform Delay: The Case of South Africa," 2018 Annual Meeting, August 5-7, Washington, D.C. 274365, Agricultural and Applied Economics Association.
    7. Kazuki Hiraga & Kengo Nutahara, 2019. "Fragility in modeling consumption tax revenue," CIGS Working Paper Series 19-003E, The Canon Institute for Global Studies.
    8. repec:eee:jotrge:v:76:y:2019:i:c:p:191-199 is not listed on IDEAS
    9. Morikawa, Masayuki, 2016. "How uncertain are economic policies? New evidence from a firm survey," Economic Analysis and Policy, Elsevier, vol. 52(C), pages 114-122.

    More about this item

    Keywords

    Pension reform; policy uncertainty; aging demographics; fiscal sustainability; Japanese economy;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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